On July 10, 2017, the Express Tribune published an article called Fighting Corruption: the call for public procurement reforms. In this article written by Faran Mahmood, the author discusses the challenges and tactics used on government infrastructure projects in Islamabad to preserve and promote collusion and corruption in construction.
It’s a damning albeit short piece which highlights several tactics which allow corruption to blossom.
As I have always done in this Blog, I want to present to you this article and translate for you it’s main points into private sector procurement.
The practices that Mahmood discusses are the kinds of corrupt practices that result in kick-backs and pay-offs in exchange for government contracts, but collusion does not need to result in someone receiving financial gain for corruption to exist.
In the private sector we are not bound by the same procurement practices associated with government funding, therefore private enterprise is less restricted and more free to operate freely.
Decisions to competitively bid, award, or even withdraw contracts are at the business’ discretion.
Publicly Traded companies governed by The Sarbanes–Oxley (SOX) Act of 2002, also known as the “Public Company Accounting Reform and Investor Protection Act” are the exception.
The SOX Act mandates that publicly traded companies establish a set of internal procedures designed to ensure accurate financial disclosure. These procedures could include procurement guidelines and award requirements.
Regardless, even unregulated privately held businesses need to be aware of certain soft practices that may be signs of collusion between their employees and Vendors.
Today I want to cite a few of the most common and detrimental practices which you should avoid and/or be on the look-out for in your company.
In a previous article I discuss how proprietary specifications are used to exclude or specifically include certain companies or products. Using proprietary specifications is not exclusively good or bad, but you should be wary of this practice and only use proprietary specifications when you have clear cause to do so.
The thing to avoid is using proprietary specifications exclusively and without consensus. Instead use general specifications that promote open competition and allow for products that may perform well but may be more economical.
Free Due Diligence or Pre-Construction Services
Many Vendor will give away services in exchange for insight or perhaps promises of awards. These forms of engagement must be avoided at all costs.
Whether it is an architect providing a free concept plan or a general contractor preparing a cost estimate pro-bono, these practices compromise your ability to negotiate and hamper your ability to competitively bid work.
I recommend always paying for these services. Even compensation of a small fee relieves you from any further obligation to the Vendor.
Short Bid response times
One of the worst practices in procurement is releasing a Request for Proposal or Request for Quotation with short or limited response times.
Bid periods of a week or less limit the number of responses and signal to Vendors that you are not seriously seeking competitive bids.
I recommend a minimum of 2 weeks for every bid. This gives Vendors sufficient time to respond to your inquiry and is sure to result in a higher response rate than lesser duration’s. In fact if you have a large or complicated project and you are soliciting a lump sum bid, three or four weeks may be more appropriate.
Another practice that is a sign of collusion is taking larger projects and breaking them down into small scopes of work.
Splitting scopes of work into small pieces may simply be the way you or your facilities team manages their work, but in many instances, it may also be how they keep incumbent contractors employed.
Small contracts are often not worth the effort and cost of responding to an RFP. For many vendors the labor costs involved with responding to RFP requests are too high and they must be selective about when and how they respond. If you are soliciting projects in small scopes of work, only incumbent vendors are likely to respond. This is often done intentionally by Facilities Manager’s with preferred contractors. These preferences are often not dishonest or unscrupulous. Often Facilities Managers have a history of bad prior experiences and genuinely feel that a particular Vendor is best for the Company. Regardless, this practice needlessly exercises your procurement team and the market and paints your Company as one that is closed to outside Vendors.
Aside from regular maintenance and repairs, alteration projects within a building scheduled within 6 to 12 months of one another should be treated as a single scope of work. Not only will this attract a larger pool of bidders, it will also allow your projects to progress more smoothly and with less delays.
Single Source Awards
Single source awards are the most obvious and pervasive signs of collusion.
It should be obvious that anytime you award work to a Vendor without a competitive bid, the potential for collusion or impropriety is much higher. There are many reasons Stakeholders will ask for single source awards. The most common is schedule. Regardless, it’s imperative that single source awards be used sparingly. I wrote an article a few months back about how to avoid the appearance of impropriety and why you should avoid single source awards. For more on this topic check out this link.
Order of Magnitude Budgets
One of the ways that Stakeholders often create conditions for collusion or corruption is by awarding projects on the basis of budgetary quotes.
Similar to item number 2, Stakeholders often contact Vendors asking them for budgetary quotes. These quotes are typically provided by incumbent Vendors at no cost. These “no-cost” estimates later become the Stakeholder’s budget. The problem here is that these budgets are often provided with a scope that is little more than a “napkin sketch”. Vendors may take advantage of situations like this writing complex exclusions or making assumptions that exclude or omit scope. These exclusions are later “discovered” after award resulting in underestimating or under budgeting the work which of course increased risk of change orders.
To avoid these issues, I recommend hiring an independent estimator to develop an estimate. Estimators are trained to spot scope gaps and to develop allowances for unknown or undocumented items, so even if your scope is incomplete, an estimator will be able to give you a more accurate budget.
So those are 6 practices that lead to or signal collusion. Be wary of these practices in your own organization and if you have procurement responsibilities, be sure to avoid these as they could give off wrong signals about you.
Are these prevalent in your Company? Are there other behaviors you think I should have included? Tell me your stories.
Thanks for reading. If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe. This helps promote my content and is greatly appreciated.